July 9, 2013

More than twenty years ago three American economists Kevin Murphy, Andrei Shleifer, and Robert Vishny (1991) found the evidence that "countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow more slowly." Since then other researchers tested and confirmed their theory and findings.
Murphy, Shleifer, and Vishny argue that a country of lawyers direct talent towards rent seeking, when a country of engineers apply talent to entrepreneurship. Occupational choices depend on market institutions. Returns to ability and education determine occupational choice. Returns to scale in each sector of economy, market size, and compensation contracts also affect occupational choice. Many talented people become entrepreneurs when it is easy to do business and keep profits. Otherwise, talented people join law firms, government bureaucracy, and other rent-seeking institutions.
Does this explanation fit the case of Ukraine? Definitely, you see very few entrepreneurs in Ukraine. What do you see most of time? Lawyers, various government officials, and corrupt businessmen. Most lawyers make big bucks in raiding private property. Government officials take and extort bribes. Successful businessmen are also corrupt ones. They are not entrepreneurs. In Ukraine a successful businessman who uses his political connections to corner the market and raid someone's business is not entrepreneur. This businessman's success is not the result of market competition. His fortune is not the result of his alertness to some change in the economy. He is successful because he applies his talent to corruption. That's pretty much a current economic situation in Ukraine, the nation of many lawyers and very few engineers.

It was said, "Many talented people become entrepreneurs when it is easy to do business and keep profits. Otherwise, talented people join law firms, government bureaucracy, and other rent-seeking institutions."

Does this include Ph.D.'s teaching at educational institutions?

Is 'rent-seeking' just jargon for getting unearned income? Or unearned favorable treatment?

These questions are really good. Thank you for asking these questions.Though rent-seeking is an economic concept, some economists dislike it because the concept is ambiguous. In general, rent-seeking is a human action directed at obtaining rent using non-market means of competition.Rent is an old economic concept popularized by Adam Smith, David Ricardo, and even earlier economists. Rent is a return to a factor of production. Land literally earns the rent. Capital earns interest. Labor earns wages. Entrepreneurship earns profit. Non-market means of competition include everything that violates free market competition. The first post mentioned government leeches. It's a good example. Government leeches can be labor unions that use legislature to protect their jobs and receive privileges. Companies can also be government leeches if these companies receive some protection from their competitors. This protection can include licensing, quota, price fixing, trade barriers, and so on.Rent-seeking is the jargon that economists use when they talk about non-market profit-seeking behavior. You still need to earn a favorable treatment. But you can earn it only by violating market competition.Teaching, research, and education do not get any favorable treatment. Teachers do not violate market competition. Teachers and universities, however, can be corrupt in some countries. If a teacher receives a bribe in exchange for passing an exam, it violates market competition. If a research accepts a gift in exchange for falsifying his findings, it also undermines the free market ethics.

Nope. It's still me. I just forgot the password for my account.If license restricts market competition, it is the outcome of non-market behavior. After all who gives out licenses? The government. How does the government know how many cab drivers or doctors we need? The government has no idea. By the way, have you read Walter Block's "Defending the Undefendable"? Dr. Block has an excellent discussion of licensing when, for example, he talks about "gypsy cabs". It's chapter 11 in his book.When it comes to new product and, in general, intellectual property, we are talking about patents and others forms of protecting property. Of course, private property must be protected. The theory of natural property rights says that a product or means of production becomes yours if you mix your labor with it. Labor can be physical and intellectual. Sure, make it and protect it.

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This blog is about Eastern Europe, the former Soviet states, Ukraine, economics, and politics. I'll try to follow the major events from the perspective of the political economy. Or sometimes I'll blog about something else.